Corporate Finance 2_Quiz 7

1. 1)  A warrant bestows on its owner the:

• 1. obligation to sell securities directly to the issuer at a fixed price for a stated

     period of time.

• 1. right to sell securities directly to the issuer at the prior day's closing price for a

     stated period of time.

• 1. right to purchase securities directly from the issuer at a fixed price for a stated

     period of time.

• 1. right to sell securities directly to the issuer at a fixed price for a stated period of

     time.

1. The upper limit of a warrant's value is best defined as the:

• 1. underlying stock price.

• 1. MAX(0, Exercise price − Stock price).

• 1. MIN(0, Stock price − Exercise price).

• 1. MAX(0, Stock price − Exercise price).

1. Which one of the following occurs whenever a warrant is exercised?

• 1. The number of shares outstanding increases

• 1. The issuer pays the lower of the exercise price or the stock price

• 1. A new warrant is issued to replace the exercised warrant

• 1. The issuer receives the greater of the exercise price or the stock price

1. If a corporate security can be exchanged for a fixed number of shares of stock, the security is said to be:

• putable.

• protected.

• convertible.

• callable.

5. A convertible preferred stock is similar to a convertible bond except that:

• 1. preferred stock converts to common stock while bonds convert to preferred

     stock.

• 1. the conversion ratio is fixed.

• 1. the conversion price is fixed.

• 1. the time to maturity is infinite.

5. The holder of a $1,000 face value bond has the right to exchange the bond any time prior to maturity for shares of stock priced at $50 per share. The $50 is called the:

• 5. exercise price.

• 5. conversion price.

• 5. stated price.

• 5. par value.

5. Convertible bonds:

• 1. require conversion on or before the bond's maturity date.

• 1. are secured by shares of common stock.

• 1. are generally issued by firms that have lower bond ratings than the average firm.

• 1.  grant the owner the option of receiving either cash or shares of stock on conversion.

5. Modern Windows issued warrants for one share per warrant with an exercise price of $21. On May 1, the common stock is selling for $23 a share. The lower and upper
   limits on the warrant value on this date are:

• 5. $0 and $21.

• 5. $2 and $23.

• 5. $0 and $23.

• 5. $21 and $23.

Outer Wear has 12,000 shares of stock outstanding. Each share has a .5 warrant attached. These warrants expire today. The market value of the firm's assets net of its
debt is $192,000. One new share can be obtained for one warrant plus $18. Assuming
all else held constant, what would you expect the market price per share to be

tomorrow morning when the stock market opens?

• $16.00

• $18.00

• $15.33

• $17.50

Diamond Drill has 150,000 shares of stock outstanding at a market price of $46 a share. The holder of a $1,000 face value bond can exchange the bond at any time for 25
shares of stock. What is the conversion price?

• $25

• $40

• $20

• $46